Business Loan Packaging 101 – Bank Loan Policy

What would life be like if there were no rules and / or codes of conduct? Right… if you were thinking total and complete anarchy, then I would say you’re thinking rationally. If not, then I would recommend you check your basis of reality. In life, we’ve all come to expect that in various circumstances, there are certain rules or ‘codes of conduct’ that one must abide by in order to expect a specific result. Well, it’s no different when dealing with banks from a business loan standpoint. In this article, I give an overview of a basic bank credit policy by which a bank abides by a certain framework (i.e. process) for originating, analyzing, closing, and monitoring business loans. By understanding the basics of this process, prospective clients minimize the element of surprise in terms of obtaining a business loan, and they are educated on the process to maximize preparation especially concerning the business loan package.

What’s the Reasoning for a Bank’s Credit Policy?

The credit policy for a bank provides a standardized process by which specific bank personnel follow to either approve or deny loan request. For business loans that meet a certain loan amount and industry, there are special provisions and in some instances ‘exceptions’ made to streamline the process. So, am I saying that banks have special rules for special loan requests? You better believe it. Depending on the significance and profitability of the client, exceptions are willfully and readily made. The primary reason for a bank’s credit policy is to minimize a pool of risks that if left unchecked can cause a bank to go out of business. For listing purposes, these risks include, liquidity risk (i.e. inability to pay deposits upon request), credit risk (i.e. bad loans are bad news for banks), interest rate risk (i.e. banks make their money on ‘spreads’), and market risk (i.e. benefit vs. risk of taking on market demand in terms of loans and deposits).

Policy Basics

These include the procedures and steps a bank takes to originate, analyze, close, and monitor business loan requests. Contrary to popular belief, a bank is not entitled to lend money to anyone, but they will take your deposits willingly (within the scope of federal regulations, of course). Although bankers won’t explicitly give a client its specific bank credit policy, you can get a pretty good idea of your banker’s appetite for various loan types.